from the well,-let's-see... dept

Over the years, one of the companies that we've talked about here that has been full of hyperbole, but almost no substance, has been music startup Lala. It's gone through many different incarnations, each coming with grandiose claims that weren't supported by any reality. The amazing thing is that every time it made an announcement, the mainstream media rained down praise on the company, as if it were the savior of the music industry. For example, when it first launched, it was a near exact clone of an already widely failed business model: having people pay a dollar to trade their used CDs. Yet, the mainstream press treated the company like it was a great new concept -- despite the fact that a bunch of dot coms during the bubble had tried and failed to do that, and the company PeerFlix was already trying (and failing) to do the same thing in the DVD space. The press was so bought into the concept of Lala, that the NY Times even included the heavily venture funded, for-profit company in a story on companies that didn't want to profit (seriously). Then the company got lots of press by claiming it would donate 20% of its profits to a charity for musicians. But what about the claim that it didn't want any profits? If that were true, what profits did it plan to give away (and why only 20%)?

Either way, not much came of the CD swapping business, and last year, the company totally changed its business model, instead offering up free streaming music, insisting that it was ready to spend $140 million on those streams (despite the fact that, as far as we know, the company had only raised $9 million). The business model was apparently to lose money on every stream, and then get people to buy un-DRM'd music downloads instead. Except that, once again, the company was exaggerating. The non-DRM turned out to be a different kind of DRM, and as for that non-existent $140 million the company was ready to spend? Well, apparently it never showed up because the company shut down the service just a month later.

So, forgive us for being a bit skeptical whenever the company roles out a new announcement, and the press rushes to write about it. But, here we are, with Lala's latest business model being announced. At least, this time, much of the press coverage acknowledges Lala's ever-changing business and expresses some amount of skepticism.

On the whole, though, it's new idea sounds better than previous versions, at a first glance. The idea is to set up something of an online iTunes, with a few interesting features. For example, you can listen to any song in its catalog once for free. After that, you can "buy" it for only 10 cents. The problem is that you're only buying access to a stream of the song, rather than actually buying the song. So, the song itself goes in your online music player, and can then be accessed and played from any web browser. If you then want to buy an MP3 version, it costs another $0.79. On top of all that, apparently, you can download an app that will automatically add all of the music you currently have (whether legally or illegally obtained) to the online app. I tried to download the app and received an error, so I have no idea if it actually works. Update: Got the download to work and scanned my collection. It recognized significantly less than 50% of my music, though that may say more about my musical tastes than about Lala. Also, I specifically told it not to upload my music, and it is doing so anyway. That's not very comforting.

There are a few notable things here. First, getting a bunch of record labels (both majors and indies) to agree to a 10 cent price for anything is a first. Second, getting the industry to agree to a system for "unlocking" songs that people already had (even ones they downloaded through unauthorized means) is also quite a feat. In the past, the RIAA has fought vehemently against such systems, such as when it sued the original MP3.com. If the system works, I could see it as a useful way of syncing the music I already have to an online player -- and if it actually works well, it's possible that it could make sense to then purchase other tracks that way. But there are a lot of ifs involved in that process, and initially, many people might just try to use it as a backup/virtual iTunes, meaning they won't buy anything new from it, which would quickly drain Lala's remaining bank balance, without bringing in much revenue. A Business Week article notes that the company only has $3 million left in the bank, which isn't very much unless it can raise another round.

One other point. That Business Week article concludes by suggesting that Lala's success may come from the fact that it's just trying to sell music, noting that it's about time the focus was just on selling the music: "An approach that's all about selling music. Not iPods, and not ads. Just music." I can understand why someone might think that makes more sense, but it's unlikely to succeed. Because of the lack of marginal cost on music, there will always be a downward pricing pressure. Therefore, focusing just on selling music is a dangerous business model. For instance, even if all music is free, Apple's going to make good money selling its scarce iPods. But if more and more musicians decide to offer free music, then Lala may need to find yet another business model to stay in business. It sounds great to focus on "just selling music" but the economics suggests that doing so is a bad business proposition.